Auditors' “Pass/Fail” Assessment Debated Among Advisors

A recent roundtable with the Standing Advisory Group of the Public Company Accounting Oversight Board became the stage for a debate over whether auditors should issue more information in their audit reports than the standard “pass/fail” assessment.

Barbara Roper, director of investor protection for the Consumer Federation of America, said she favors more detail because the standard unqualified opinion makes no distinction between a company that does the minimum work to get a passing grade and a company that makes a concerted effort to provide thorough financial reporting.

Opponents, however, say more detail will only confuse investors. “The investing public should be able to read a financial statement and pretty much get out of it what’s good and what’s bad,” Wanda Lorenz reportedly told the group. She is a CPA and partner with Lane Gorman Trubitt in Dallas.

Roper

Roper suggests a two-tier approach to keep it simple and still provide more information. “You have to keep the straight up-and-down report,” for the average investor who only wants brief information, she said. “But I think you can adopt a reporting model with the audience in mind that would actually read it,” such as institutional investors and analysts. A more detailed report might provide the kind of information that is discussed with the firm’s audit committee, she said.

Turner

Lynn Turner, managing director of research for Glass Lewis, agreed audit reports could say more. “I support making it more descriptive for investors as to what an auditor does, while still requiring the auditor to opine on whether he or she agrees the numbers are true and accurate,” Turner said.

As an example, Turner compared auditor reports for U.S. Steel Corporation from 1902 and 2002. The 1902 report “lets you know more about the work the auditor actually did,” Turner said. “Seems like we have gone backward in the last 100 years.” Turner specifically noted the difference in language. The 1902 report describes statements as “correctly prepared” compared with today’s standard terminology, “fairly presents.”

Following the Standing Advisory Group meeting, the PCAOB staff will determine whether to bring the issue to the board for discussion. Spokeswoman Christi Harlan said the standard-setting efforts of the board are following an agenda of priorities disclosed late last year, which she noted does not mention the auditor’s reporting model. “Of course, priorities can change,” she acknowledged.

A briefing paper from the PCAOB advisory group meeting is available in the box above, right.

Commissioner Voices Concern Over SOX Section 404 Reporting

Glassman

Cynthia Glassman, a commissioner for the U.S. Securities and Exchange Commission, is worried companies are focusing on form over substance when it comes to their Sarbanes-Oxley Section 404 reporting requirements.

“I have been concerned from the beginning that Section 404 would become an expensive, short-term, check-the-box exercise, taking focus away from management and moving it to internal and external auditors,” she said in a speech last week at a conference in London.

“I have been concerned that the 404 assessment would not be seen by senior management and boards as an important component of their overall risk management,” Glassman said. “I am concerned that internal controls have become an end in themselves and not, as intended as a means to the end of limiting the possibility of fraud or mistakes in financial reports.”

She implored the market to “put the first year of 404 reporting in context. Disclosure of material weaknesses or significant deficiencies does not necessarily mean the financial statements are deficient.”

In a separate speech, also last week, Glassman reminded that internal control requirements are not new, only reporting requirement surrounding internal controls. “With all the increased focus on internal controls, it would appear that this is a new requirement and responsibility for public companies,” she said.

As Group Creates SOX Certification Program, Experts Say, “Huh?”

So pervasive is the impact of Sarbanes-Oxley Act of 2002 in the business world, that an industry professional association has created a professional certification program to promote understanding of the law. The Sarbanes-Oxley Group, founded in 2003 by a trio of management and technology consultants, is launching a training and certification programs for various professionals with compliance-related duties.

SOX Group Chairperson Sanjay Anand is also the founder and CEO of consultancy CLA Solutions Assurance Systems. He said the firm’s Sarbanes-Oxley workshops were in such demand, they became the basis for the more comprehensive SOX training and certification program that the group is now marketing. “There’s no standard in place to assess the value and ability of Sarbanes-Oxley experts,” he said. “And there’s a lot of demand for SOX-specific knowledge.”

Longer established organizations, however, have never heard of the SOX Group, nor do they know of its expertise to certify experts. A spokeswoman for the Institute of Internal Auditors said she heard of the group for the first time when it announced its plan to begin certifying professionals. The American Institute of Certified Public Accountants said it was investigating the group, but offered no further comment.

“Ultimately the marketplace will decide as to whether there is demand for this type of certification,” said Lynn Turner, managing director of research for Glass Lewis and former chief accountant for the Securities and Exchange Commission. “For those in the industry, the question will be whether the market sees a value that it is willing to pay for. … I suspect those who already have a CPA certification will think that is sufficient, and I would tend to agree.”